‘Three things I would tell my 18-year-old self’
I can look back now at a period of life (university) which was low on academic effort (as most tutors will readily attest), even less on personal responsibility, and close to zero on financial understanding. As a result most students graduate from university with a mediocre degree, a certain level of self- inflicted debt, and a complete and utter ignorance in anything to do with any financial plans, needs or knowledge. To further compound their stupidity, 30 years ago this was achieved at a time when most of the fees and costs were covered by a generous state to unappreciative stroppy students.
For the current generation, the situation is considerably worse, given that what was found for my generation by way of support, is given now by way of a significant burden of debt through student loans. Even so I would have benefited from some wise guidance to at least give me the basic grounding on what I had to address and achieve financially in my life. Would I have taken any notice? Well probably not if it had been given as a sales pitch from a sleazy financial salesman, but had a professional Financial Adviser just talked me through the vital monetary issues, then maybe I would at least have a measure of what I was facing.
So that’s what I am doing – looking back to university days over three decades later to tell current students what I hope someone would have told me — not the facts of life (most students have already come across those), but the financial facts of life. Whether they will listen or not remains to be seen, but I am going to tell them what I would have wanted to tell myself — albeit now with significantly less hair. Given that attention spans are short for most students I have three key points that we should all know:
1. The power of compounding or how money grows:
This is the basis of most long term investment and the greatest secret that the investment world never tells you. They would have you believe that with their array of electronic crystal balls they will guide your investments to greater value over the years. Well they have neither crystal nor the other.
Compounding is best illustrated by real examples. For instance, $150 invested in the UK stock market over 67 years would give you roughly $12,000; however, that same $150 invested but this time with all the dividends reinvested would have given you over $220,000. Quite a difference.
There is the old “Rule of 72” which can also help. This number helps you to find out how often your money will double in value. What you do is divide into 72 the rate of return you hope to get. So for example let’s assume you could get 7% after all costs on your investments in the long term (not an impossible ﬁgure) – then 7 into 72 goes roughly 10 times – so your money doubles every decade. Or put it another way, $1500 invested today would in 70 years give you roughly $180,000. Not a huge sum but somewhat higher than the average Pension pot of today which is sadly around just $45,000 in the UK.
However, by adding to this then I should have a reasonable sum for my no doubt extended retirement. So long term saving is vital whether in a Pension or another Savings plan, and remember they are just the wrappers not the investment. A stale chocolate bar in a smart wrapper is still a stale chocolate – it’s the chocolate that’s key, not the fancy tax wrapper. The answer though is to start now. Of course compounding also affects debts, as anyone unfortunate enough to have fallen into the hands of the payday loan usurers will know – 4000% compounding is horriﬁc. Equally though, cheap debt can be eroded in real terms as inﬂation devalues the sum. This after all is what many western governments have been banking on to try and reduce their mountain of government debt.
2. How much do I need to live on, when and if, I retire?
This is a tiresome question that none of us can effectively answer. It is better to ask how much can I live on? Now obviously inﬂation years ahead will have an impact but hopefully your investments can grow along with that. So I ask the question for today – is it $8,000 per year? Probably not, but possibly $40,000 per annum if you have paid off all your mortgages and other issues. So how much do you need to have to translate that into an income of $40,000? Well if you ask an actuary who is trying to calculate an annuity for you, he would probably require you to handover $800,000 which sounds horriﬁc!
However before we panic let’s put things into some perspective. If you could start to put say $150 a month aside for the next 6 decades, then this could, at our 7% long term rate, turn into a sum of around $450,000.
Now this does not solve everything as of course there are going to be other issues during your life which will need addressing like housing, families, education and don’t forget medical insurance and long term care. At least though you can now get some idea of the targets and scale that you need to address. The good news is that you have got time, the bad news is that it seems to disappear faster than water into sand.
3. Simple ﬁnancial family planning
You can’t blame your parents, because they didn’t know anything about ﬁnances either. Most of our parents probably worked for companies or as professionals and so things like Pensions, healthcare, education and even old age care were not such an issue. The latter being so different because it was not too many decades ago that retirement was easily planned for, as most died, just ﬁve years after getting their gold watch! After all it was Count Bismarck that introduced the state pension to be paid to those who reached the ripe old age of 65, knowing full well that life expectancy for the average German worker at that time was 55.
Sadly all the old rules have changed in terms of Pensions, health and care. The state has withdrawn, never to return, and sadly the politicians have meddled too often in areas they had little understanding of. We can complain but to what end? What we can do though is actually not only help ourselves but also our families, no matter how dysfunctional they may be. Most of us belong to some increasingly complicated family of multiple generations, partners and marriages. However within this family are assets and liabilities, and if looked at more ﬁnancially as we might look at a company, quite often they are of some considerable value, but we just can‘t see it.
We have been told by odious salesman and tedious bankers that we are individuals and have to look after ourselves as sad individuals; I would argue against that. We are nearly all part of some dysfunctional family and thus by co-coordinating our ﬁnancial affairs more effectively there is a lot to be gained as a family than as a sole lost antelope on the savannah at the mercy of prowling ﬁnancial carnivores. As a herd we have more power, not only in managing debt (after all as a student your chances of getting a mortgage are thin and no doubt costly – but as a family far easier and much cheaper) but also your assets.
Now I have no delusions that families will all sit down and have a free and frank conversation about their ﬁnances. That doesn’t happen. However with some simple ﬁnancial planning and maybe with an actual professional Independent Financial planner, we can sit down and at least co-ordinate the ﬁnances, taxes, debt and inheritance far more effectively to the beneﬁt of all involved.
From a simple cash flow to a balance sheet, the ﬁnancial disciplines of a business can quite simply be brought to the family to ensure that all have a better idea about what really is attainable; from Grandpa’s health care through to your education costs and in due course helping with the mortgage. This after all is what the “uber wealthy” European families do – so why can’t you.
Not all the family will want to join in but that doesn’t matter, but at the least the tax and debts issues can be better addressed. However let me give you one family illustration: Let’s ask a family of ten to contribute $1500 each to a family ﬁghting fund. Then let’s invest the $150,000 sum at 7% again and watch what happens – over 70 years that relatively modest sum will be probably over $1.8 million – so you don’t have to win the Lottery – but you can make it! If only our parents had done it earlier……………..
Oh and one last thing, investment is not the same as having a short term punt. Investment is a long term view to build up your assets. Having an investing punt maybe be fun, but is no more than the ﬁnancial version of gambling on a horse at the 2.30 at Newmarket.
So yes of course you still have your student loan to pay off, and the day-to-day living costs which seem to eat up all your income. None of us can ever save out of money left over after the end of the month – because we spend it.
So start a long term Savings Plan NOW with the payment at the beginning of the month, no matter how small, to initiate the process: and you will be surprised just how quickly that will start to grow, and you will celebrate the day you ﬁrst started the habit. It took me 8 years to ﬁnally clear my credit cards. What a fool – ‘I wish I had listened to myself 30 years ahead.
Are you a Grandparent, Parent, or do you have any Children? I can help you help them.